In September the fund returned 2.7% led by China, Taiwan and Brazil with strong performance from Alibaba, Brilliance Auto and Eletrobras. A quarterly dividend was paid of 0.207088p, making a twelve-month yield of 5.2% and a real yield spread of 140basis points over UK inflation. The total shareholder return over the same period was 25.5%*.
The positive performance of emerging markets has continued through the month, but breadth has become increasingly narrow. It seems a consensus was reached over the summer holidays that the only two assets to own were AI and gold. Every one of the top fifteen contributors to index performance was either a play on AI or mining, and collectively they accounted for two thirds of total index returns.
The capex flooding into AI has continued to grow and has moved beyond datacenters and Nvidia processors. Demand squeeze is apparent in other areas of the supply chain, most notably high-end memory and evidenced by OpenAI’s deal to purchase up to 900,000 wafers per month from Samsung and SK Hynix. This deal alone accounts for over 40% of total global output of DRAM and double the current capacity of HBM (high bandwidth memory). Given clear capacity constraints, the priority for competing AI firms now shifts to certainty of supply, so there will likely be more similar deals to come.
The rally in gold, silver and other metals has also been dramatic. The last comparable gold rally was in the first phases of QE, but annualised returns were more modest at around 30%, dwarfed by the current doubling over 1.5 years. The significant difference in this cycle has been the consistent buying from Central Banks who have doubled their previous average to over 1,000 tonnes annually. Led by emerging markets looking to diversify reserves, they now hold more gold than US Treasuries. Given the geopolitical backdrop, this is a trend likely to continue and should give some support in the event of further profit taking.
More broadly, given the strong performance since the April lows, we continued to recycle positions where yields and valuations were no longer attractive. We’ve continued to reduce UAE, Greece and Central America in favour of Taiwan, Brazil and South Africa, where the 10 year risk free rate has dropped from 11% in April to under 9%. Unusually, it’s mainly the mining stocks that have rallied given the strength in commodities, leaving high quality financials such as FirstRand looking very attractive. In Korea, the Value Up reforms continue and it has now become our best performing market year to date. We took profits in KT Corp, which was near target valuation and had been the victim of a cyber-attack, and recycled into Samsung preference shares which trades at a yield enhancing 20% discount to the ordinary shares. Currently the indicated forward yield of the portfolio is now 6.6% gross.
Despite all the various macroeconomic and geopolitical vexations, this has been an unusually benign market environment with declining bond market volatility mirroring EM equity market gains. This has now been furthered by Fed Fund futures pricing a near 100% probability of two more rate cuts this year, leaving an exit rate of 3.6%. Yields at the long end of G7 bonds have now also started to compress despite the well know fiscal concerns.
Combined with the prospect of further trade deals with Asian countries, the country cost of capital in many emerging countries are likely to follow suit, all of which is potentially supportive to EM assets as we move into the final quarter of the year.
